Pimco's Gross: Avoid Europe Until Private-Sector Solution

Pacific Investment Management Co.’s Bill Gross said investors should avoid Europe until credit begins flowing again from the private sector as government solutions aren’t enough to stem the region’s debt crisis.

“We would suggest at Pimco avoiding the entire euro zone until they can come up with some type of solution which involves the private sector,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “What does the private sector mean? It means those institutions outside of euro land. It does mean Pimco, it does mean China, it does mean those private institutions that are willing to take a chance again in terms of credit. Until you bring them back then no solution is really going to be possible.”

German Chancellor Angela Merkel has been besieged this week by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy. Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro-area aid for struggling banks.

Yields on Treasuries may continue to decline beyond record lows even though the securities are overvalued because the U.S. remains the world’s refuge from turmoil, Gross said.

Market Turmoil

U.S. government debt rallied today, pushing 30-year bond yields to a record low, after the economy added fewer jobs in May than economists forecast, indicating the worsening European sovereign-debt crisis may restrain U.S. growth. Treasury 10-year note yields tumbled to record lows for a third day, falling to as low as 1.44 percent.

“When people see this and are surprised by it, the natural human movement is to go to where there is safety,” El-Erian said. “You take the prices of these assets to ridiculous levels and that’s what we’re seeing today.”

Financial markets offered a snapshot of Europe’s stresses after more than two years of crisis, with the euro close to its weakest in two years against the dollar. German two-year note yields fell below zero today as investors paid for shelter from the market mayhem afflicting Italy and Spain.

Favored Sovereigns

Investors should favor debt of nations such as the U.S., Mexico and Brazil, and emphasize intermediate maturities over the next few years, Gross said in his monthly investment outlook posted yesterday on the Newport Beach, California-based company’s website. Equity investors should seek companies that produce stable cash flow and that are exposed to high growth markets.

Public-sector solutions to resolve the Europe’s debt crisis from institutions such as the International Monetary Fund and the ECB are “merely bodies exchanging cards in a game of old maid,” Gross said.

“Sooner or later someone will go out of the game, perhaps Greece, and the maid will be exposed,” he said.

Greece, which failed to form a government when a party opposed to the nation’s international bailout won more seats than forecast, has set an election this month that’s shaping up as a ballot on whether the country should remain in the euro.

“It’s increasingly inevitable that Greece will exit” the euro, El-Erian reiterated during the televised interview.

“The only question is how disorderly is it?” El-Erian said. “Europe hasn’t been to put the firewalls and most importantly hasn’t been able to break the link between weak banks and weak sovereigns.”

The $259 billion Total Return Fund run by Gross beat 99 percent of its competitors this year with a 5.27 percent return. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.35 trillion of assets as of September.